Scribd
Upload
739 views2 pages

Differentiate Between Specific Borrowings and General Borrowings. Give Examples. Specific Borrowings

1. Specific borrowings are loans taken out for a particular qualifying asset, where the borrowing costs for that specific loan can be directly capitalized to the asset. General borrowings are loans that are not linked to a specific asset and require calculating a weighted average capitalization rate. 2. For specific borrowings, the capitalized amount is the actual interest costs incurred less any investment income from temporary investment of the borrowed funds. For general borrowings, a weighted average rate is applied to the expenditure on the qualifying asset to determine the amount to capitalize. 3. Examples are provided to demonstrate calculating the capitalized borrowing costs for both a specific loan and general borrowings used to finance qualifying assets.

Uploaded by

Awesome Someone
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as RTF, PDF, TXT or read online on Scribd
739 views2 pages

Differentiate Between Specific Borrowings and General Borrowings. Give Examples. Specific Borrowings

1. Specific borrowings are loans taken out for a particular qualifying asset, where the borrowing costs for that specific loan can be directly capitalized to the asset. General borrowings are loans that are not linked to a specific asset and require calculating a weighted average capitalization rate. 2. For specific borrowings, the capitalized amount is the actual interest costs incurred less any investment income from temporary investment of the borrowed funds. For general borrowings, a weighted average rate is applied to the expenditure on the qualifying asset to determine the amount to capitalize. 3. Examples are provided to demonstrate calculating the capitalized borrowing costs for both a specific loan and general borrowings used to finance qualifying assets.

Uploaded by

Awesome Someone
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as RTF, PDF, TXT or read online on Scribd
You are on page 1/ 2

1. Differentiate between specific borrowings and general borrowings. Give examples.

Specific borrowings

If you borrowed some funds specifically for the acquisition of a qualifying asset, then the capitalization is
easy:

You simply capitalize the actual costs incurred less any income earned on the temporary investment of
such borrowings.

EXAMPLE:

Question: On 1st May 20X1, DEF took a loan of CU 1 000 000 from a bank at the annual interest rate of
5%. The purpose of this loan was to finance a construction of a production hall ?

The construction started on 1 June 20X1. DEF temporarily invested CU 800 000 borrowed money during
the months of June and July 20X1 at the rate of 2% p.a.

What borrowing cost can be capitalized in 20X1? (Assume all interest was paid).

Answer:

Although the funds were withdrawn on 1st May, the capitalization can start only on 1st June 20X1 when
all criteria were met (the construction had not started until 1st June).

Calculation:

Interest expense: CU 1 000 000 x 5% x 7/12 = CU 29 167

Note: this is very simplified calculation and if the loan is repayable in installments, then you need to take
the real interest incurred (by the effective interest method).

Less investment income: CU 800 000 x 2% x 2/12 = CU 2 667

Total borrowing cost to capitalize in 20X1: CU 26 500

Just don’t forget that the borrowing cost in May 20X1 is expensed in profit or loss, as the capitalization
criteria were not met in that period.

General borrowings

Now, there’s more trouble with capitalizing general borrowings, as you need to prepare a bit more
calculations.

General borrowings are those funds that are obtained for various purposes and they are used (apart
from these other purposes) also for the acquisition of a qualifying asset.

In this case, you need to apply so-called capitalization rate to the borrowing funds on that asset,
calculated as the weighted average of the borrowing costs applicable to general pool.

To illustrate it, let me give you an example about capitalizing borrowing costs on general borrowings.

Question:
KLM had the following loans in place at the beginning and end of 20X1:

Description 1 January 20X1 31 December 20X1

Bank loan, 6% p.a. 0 200 000

Bank loan, 8% p.a. 130 000130 000

Debenture stock, 5.5% p.a. 50 000 50 000

The bank loan at 6% p.a. was taken in July 20X1 to finance the construction of a new production hall
(construction began on 1 March 20X1).

The bank loan at 8% p.a. and debenture stock were taken for no specific purpose and KLM used them to
finance general spending and the construction of a new machinery.

KLM used CU 60 000 for the construction of the machinery on 1 February 20X1 and CU 25 000 on 1
September 20X1.

What borrowing cost should be capitalized for the new machinery?

Answer:
You ignore bank loan at 6% p.a., because it is a specific borrowing for another asset.

Only general borrowings relate to the financing of the new machinery and therefore, we need to
calculate the capitalization rate:

Weighted average rate = (8% x 130 000 /(130 000+50 000)) + (5.5% x 50 000/(130 000+50 000)) = 5.78%+
1.53% = 7.31%

Borrowing costs for the new machinery in 20X1 = CU 60 000 x 7.31% x 11/12 + CU 25 000 x 7.31% x 4/12
= CU 4 021 + CU 609 = CU 4 630.

You might also like